IOSG Weekly Brief: Ethereum at a Crossroads

This article will discuss some of the issues the author believes Ethereum is facing.

Author: Jiawei @IOSG

Original Title: IOSG Weekly Brief｜Ethereum at the Crossroads #266

Cover: Photo by Shubham Dhage on Unsplash

This article is for learning and communication purposes only and does not constitute any investment advice. Please reprint with the source and contact the IOSG team for authorization and reprint requirements. The projects mentioned in the article are not recommendations or investment advice.

Foreword

The editor's special reminder: The following content is only for discussing the technical principles and design rules of ETH, and does not constitute any proposal and offer. Please do not make relevant decisions based on this information, and please strictly abide by the laws and regulations of your country and region (Mainland China readers are strongly advised to read the "Compilation and Key Points of Laws and Regulations Related to Blockchain and Virtual Currency in Mainland China"). Do not participate in any financial activities prohibited by law.

dba co-founder Jon Charbonneau published an article titled "Etherum's North Star" at the end of last year, pointing out that Ethereum lacks a clear "North Star" goal. Jon also pointed out in an earlier tweet that even within Ethereum, they cannot reach a consensus on its core product.

During this cycle, discussions about the poor performance of the ETH price have been endless in the community. In summary, the ETH price is not only a reflection of market sentiment, but also a key factor in whether Ethereum can unify the community's vision, balance decentralization and performance, and consolidate its position as the leading smart contract platform.

Inspired by the above article, this article will discuss some of the issues the author believes Ethereum is facing.

ETH price – It does mean something

In this cycle, we have seen the ETH/BTC exchange rate hit a multi-year low, and the SOL/ETH ratio continue to hit new highs, which has become the main factor criticized by the community about Ethereum.

The technical geeks at the Ethereum Foundation are averse to the community's dissatisfaction with the ETH price, believing they are a bunch of short-term speculators. Indeed, protocol design should not be price-driven, but excessive avoidance of price discussions is also a poor performance. This section discusses the importance of the ETH price.

ETH price is directly related to the EF's runway

From the EF's 2024 report, as of October 2024, the EF's total assets are about $970.2 million, of which $788.7 million are cryptocurrency assets (99.45% are ETH); $181.5 million are non-cryptocurrency assets.

If the burn rate remains at $130 million per year and the ETH price is stable, the current treasury can last about 7.5 years. A drop in the ETH price will shorten the actual runway, and vice versa.

A burn rate of $130 million is an exaggerated figure. Previously, the community also criticized the EF's staffing redundancy (about 200 people), with only 35% being technical personnel. Aave founder Stani Kulechov proposed to cut the burn rate to $30 million and downsize to 80 people.

Protocol security

The ETH price directly affects the cost of attacks under the PoS consensus. Of course, the actual attack also needs to consider the geographically dispersed validator nodes and the Slashing mechanism, but the price is still a key factor.

After Ethereum adopted the PoS mechanism, the ETH price directly affects the rewards of the stakers. A drop in the ETH price will also shrink the actual rewards, which may lead to the exit of staking nodes and a decline in network security. Currently, Lido's TVL is about $20 billion, down nearly 50% from the high of $40 billion in December last year. Last year, the SOL/ETH trading pair reached a peak of over 3 times, and the SOL staking reward is still about 2 times that of ETH, which may drive many stakers to shift from Ethereum to Solana in the next cycle.

Confidence of ecosystem participants

Needless to say, the price is the result of the "vote with their feet" of ecosystem participants (developers, users, investors and other roles). In the current cycle where mainstream public opinion is generally not optimistic about Ethereum, the poor price performance may trigger a negative feedback loop.

Eric.eth, an early Ethereum ecosystem developer and co-author of EIP-1559, also published an article stating that as Vitalik steps back, the Ethereum Foundation (EF) is gradually becoming disconnected from the community, and opacity is increasing. Facing the expansion of competitors like Solana and the "anti-competitive" attitude of the EF, he has received many questions from early Ethereum developers on "why they persist in staying in this ecosystem".

The price of ETH is a mirror and should receive the attention and emphasis of the EF.

Decentralization is a spectrum, and so is competition

Different people, from different positions, will inevitably have different understandings of decentralization. Solana's memecoin traders do not need a blockchain that can withstand nation-state level attacks, as the distribution of memecoin stakes, dev run, and rug pull addresses can be seen on the chain, which is enough for them.

Similarly, competition and non-competition are also relative relationships. The author believes that the main competition Ethereum faces is as follows.

The author previously mentioned in the Ethereum staking report that ETH, as the reserve asset of the DAO treasuries of various protocols, the collateral of CeFi and DeFi, as well as the unit of account and medium of exchange for NFT transactions, MEV pricing, and token trading pairs, should be considered a value storage asset due to its continuous existence in time and space.

But this is only within the Ethereum ecosystem. In a broader sense, looking outside the ecosystem, the value storage property of ETH is still significantly weaker than that of BTC.

For example, from a positioning perspective, since its inception, people have begun to build narratives around "digital gold" and "scarce assets resistant to inflation" for BTC, with its core function clearly defined as value storage, making it more easily understood by the mainstream market and the public.

Ethereum, as a smart contract platform, derives its value from Gas, staking rewards, and the ecosystem applications built on-chain. This complexity dilutes its value storage property, and the public is more inclined to view it as a "technology token" or "utility token" rather than a pure value storage tool.

In terms of supply, BTC has a fixed total supply of 21 million and gradually reduces its inflation rate to zero through the halving mechanism. The actual inflation rate of ETH may be lower than BTC after the implementation of EIP-1559 and PoS. But recently, due to low network activity, it has gradually returned to inflation and is constantly changing with network fluctuations.

Compared to BTC, the complex functions and mechanisms of Ethereum require a higher cognitive threshold. Additionally, institutional investors (such as MicroStrategy and Tesla) publicly holding BTC as a reserve asset has also strengthened the legitimacy of its value storage.

Therefore, currently, the value storage property of ETH is difficult to compete with BTC. Ethereum's core positioning is as a smart contract platform.

As a smart contract platform, Ethereum is facing fierce competition from Layer1 protocols like Solana and Sui. From a data perspective, although Ethereum dominates in stablecoin issuance and TVL, it shows a declining trend in key metrics such as daily transaction volume, daily active addresses, and transaction count.

Looking at the capital flows over the past year, protocols like Base, Solana, and Sui have captured significant inflows, while Ethereum has seen an outflow of nearly $8 billion. Ethereum's ecosystem transactions are concentrated on Base and Arbitrum, which aligns with the Rollup-centric roadmap, but the low activity on L1 may somewhat affect the market's pricing of ETH.

Between platforms, developers, applications, and users, a feedback loop is essentially formed. Good platforms attract quality developers, developers build good applications, applications attract users, and users drive the prosperity and growth of the platform.

Due to the different technical development paths of Ethereum and Solana, developers often need to choose one of the two platforms. Therefore, at the "smart contract platform" layer, they are in a competitive relationship.

The Solana roadmap website is concise, with only four words, abbreviated as IBRL. But Solana is not limited to high performance at the moment. In addition to the technical IBRL, Solana's culture and attention capture also have differentiated competitive points.

The author previously asked on X why they don't launch memecoins on Ethereum L2, as L2 also has the characteristics of low cost and high throughput. The answer received was "culture". In general, the user profile suggests that Ethereum users seem to be more "old money" engaged in DeFi mining, while Solana represents fresh blood and rapid capital flow and redistribution.

New things often better capture attention when compared to old things. The author has talked to many founders in this cycle who have chosen to build consumer applications on Solana, and in addition to technical reasons, they mostly mention the word "attention" - more users are focusing on Solana this cycle.

In this period of abundant projects and extremely scarce attention, founders will try their best to increase the exposure of their projects and let the market discover their products. Solana also has more hot money and a smoother user experience, because when you want someone to use your product, every additional step is friction and an obstacle.

The Insider's Dilemma - The Ethereum Foundation's Choice

Is "non-action" suitable for the highly competitive Ethereum?

The community is divided on Aya's appointment as the Ethereum Foundation's chairperson: critics point out that during her 7-year tenure, Ethereum's development progress was slow, developer support was insufficient, and the token price was weak, all of which are directly related to her management; her advocated "reductionist philosophy" and decentralized governance have been criticized as "laissez-faire", causing the EF to fail to actively coordinate ecosystem resources, in stark contrast to the efficient operation of the Solana Foundation.

These evaluations are difficult to clarify in the short term and are not within the scope of this article, but they do reflect the community's discontent to some extent, serving as an outlet for the accumulation of emotions.

EF's role has never been to control or own all domains in Ethereum. Instead, our responsibility—our accountability—lies in upholding Ethereum's values. Through both our actions and our non-actions, we are accountable for ensuring that Ethereum remains resilient, not just as a network, but as a broader ecosystem of people, ideas, and values—never reduced to a single organization's product. ——Aya Miyaguchi

On the day of her appointment, Aya published an article "A new chapter in the infinite garden", stating that the Foundation's role is that of a "gardener" rather than a "controller", supporting the ecosystem through measures such as cultivating client diversity, research coordination, and community activities; advocating adaptive growth and decentralized leadership, and opposing corporate-style expansion; believing that Ethereum needs to maintain its original vision as the "world computer".

The author believes that when discussing values and ideals is beneficial during a growth cycle, but if the system is in a state of decline and unable to generate increments, such "high-sounding rhetoric" will appear powerless and unpersuasive.

The prerequisite, practice, and development of the value of becoming the "world computer" is that people are building on the ecosystem and willing to follow and promote this value. And the prosperity and growth of the ecosystem is a necessary condition.

In "Five Vermin", Han Feizi pointed out that the essence of Confucian "using culture to disrupt the law" is empty talk about benevolence and righteousness, neglecting real contradictions. When resources are limited, empty talk about benevolence and righteousness will lead to a departure from actual needs, and must rely on practical means such as "law, technique, and power". When Confucius traveled to the states, only the relatively prosperous state of Wei briefly accepted his idealism; in the war-torn states of Song, Chen, and Cai, Confucius' idealism was neglected due to the lack of material foundation.

In recent times, the community has questioned the Ethereum Foundation (EF) for continuously selling ETH and not using staking or other financial means to maintain the runway. On the same day, the EF sold a small amount of ETH. This move was seen as quite poor given the growing discontent in the community. Vitalik stated that if the foundation were to stake ETH, it could be forced to make an "official choice" in controversial hard fork events, which would go against Ethereum's decentralization principle. This rather vague and unconvincing reason failed to address the community's core concerns.

Based on the above discussion, whether it is the sluggish performance of various data points as a "smart contract platform" or the lackluster price of ETH as a "store of value" currency, Ethereum seems to be struggling. At this point, choosing to persist with a hands-off approach may not be the wisest decision.

"Ethereum is an Ecosystem, Not a Company"

In a Chinese AMA on February 27th, Vitalik emphasized that Ethereum is an ecosystem, not a company.

I believe Ethereum is a decentralized ecosystem, not a company. If Ethereum becomes a company, we will lose most of the meaning of Ethereum's existence. Being a company is the role of a company. -- Vitalik Buterin

The author agrees with the view that Ethereum should not be treated as a company, as a corporate-style operation would inevitably prioritize profitability, which conflicts with Ethereum's long-standing positioning. However, a non-corporate approach makes it difficult to establish metrics to measure the system's efficiency, and the system's goals become divergent rather than focused on a specific point or direction.

The irony is that although the EF does not consider Ethereum to be a company, the public's pricing and valuation of Ethereum still tend to be based on a corporate model, referring to metrics such as active addresses, transaction volume, and protocol revenue, making it difficult to achieve the simplicity of Bitcoin's "totem" status.

Looking at a series of fundamental data points such as protocol revenue, Ethereum no longer has strong momentum. For example, due to the sluggish L1 activity, the ETH burn has decreased significantly, and Ethereum has exited its nearly two-year deflationary cycle, returning to inflation with an annual inflation rate of 0.72%.

On the technical development front, Aya wrote in an article: "Instead of controlling, we steward All Core Dev calls to create space for technical decisions to emerge through community wisdom." The coordination-over-control approach is good in principle, but it may be too idealistic. A coordination-focused method will encounter many problems in practice, such as inefficiency and high friction. With everyone having their own opinions and a lack of holistic decision-making, execution becomes challenging.

Of course, this article does not determine who is right or wrong, nor is it a criticism of the EF's actions, but rather an attempt to present the author's views and logic, highlighting the pros and cons. In summary, the author believes the EF needs to be pragmatic, face reality, identify problems, listen to the community's opinions, and take action accordingly.

Conclusion

Crypto has different main narratives in different cycles. In this cycle dominated by the Bitcoin ETF mainstream narrative and the Solana memecoin hype, Ethereum is clearly not favored by the market. Ethereum has great values and idealism, but these superstructures need real use cases and a supportive community.

While maintaining these values, what can Ethereum do at this stage?

• Accelerate development, focus on scaling, and solve cross-L2 interoperability issues to make Ethereum technically usable. Attract long-term-oriented developers, etc.
• Education. Ethereum.org has done a great job with multilingual support. Ethereum is unlikely to do much political lobbying, but global education is quite necessary.
• The EF needs to reform, achieve governance transparency and community oversight, and balance idealism with market demands.

As a long-time Ethereum enthusiast, the author is saddened by the current situation, but also looks forward to seeing challengers like Solana disrupt Ethereum's position - after all, the story of latecomers challenging the established "winners" in Crypto is constantly being repeated, which is equally inspiring.

Hope we can make Ethereum great again.

Milady.

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